National Pension Scheme: an excellent financial instrument to help build a corpus for retirement and also reduce taxable income

National Pension Scheme or NPS was launched by the government in 2004 and opened to the public in 2009; since the time it has been opened for the people, it has become one of the most attractive instruments for saving for retirement in India. 

Retirement is a double-edged sword; if you have planned it right, the time can be the much-needed opportunity for many who are done with a significant part of their responsibilities and now can look forward to doing things that they have always wanted to, indulge in leisure, self-care, and even travel. 

However, the same thing not done right can also become challenging, as medical expenses might be a consideration for many, and also the fact that not being independent and dependent on your children for your needs both financially and physically may prove to be the worst situation.

Hence, NPS provides the tool for people to save for retirement in India, it is low cost, and one of the most beneficial is the tax benefits it offers.

What is NPS?

National Pension Scheme is a voluntary retirement scheme, and by investing in it, one can build a retirement corpus and also get a monthly pension for life after retirement. 

Any Indian national between the age of 18 and 65 can join it, and it is regulated by the Pension Fund Regulatory Development Authority or PFRDA.

However, since it is a retirement scheme, an investor cannot redeem his money before the age of 60; however, a partial withdrawal is allowed in specific needs.

What are the tax benefits?

It is to be noted that one can claim a deduction against NPS investment only for investments done in Tier 1 account —

• Tax benefit under Section 80C

NPS is one of the listed investment options in which one can invest and save tax under Section 80C

The deduction limit for this section is Rs. 1.5 lakhs, and one can also look at investing the entire amount in NPS and claim the deduction for the same.

 

• Tax Benefit under Section 80CCD (1B)

This is an additional tax benefit provided only to NPS investors. Under this section, one can claim a tax deduction for one investment up to Rs. 50,000; this is over and above the deduction that one claims under Section 80C. 

Hence one can claim a tax deduction of up to Rs. 2 lakh simply by investing in NPS – Rs. 1.5 lakh under section 80C and another Rs. 50,000 under Section 80CCD (1B).  

This basically means that if one falls under the tax benefit of 30%, one can save Rs—62,400 in taxes.

 

• Tax Benefit under Section 80CCD (2)

This benefit can be availed on the contributions made by the employer; hence, this one is meant for the salaried individual and not for those who are self–employed. Government employees can claim 14% of their salary tax deduction under this section. Meanwhile, for the private sector employees, it is capped at 10% of their salary.

Thus NPS serves as an excellent tool for retirement planning and savings.

To give a better perspective of the benefit of investing in NPS can be seen through the below example.

Let us assume a corporate employee earns Rs 6 lakh as the basic salary and another 3 lakhs as Dearness Allowance.

Hence, this individual can claim 10% of Basic + DA, which means he can claim Rs 90,000 on his employer’s contribution. 

If he adds the deductions under Section 80C and Section 80CCD (1B), he can claim deductions up to Rs. 2.9 lakh.

To further illustrate the same:

 

Basic Salary	6 Lakh
DA	3 Lakh
Deductions under 80C	1.5 Lakh
Deductions under Section 80CCD (1B)	50,000
Deductions under Section 80CCD (2) (10% of salary + DA	90,000

  Total deduction that can be claimed                         2.9 Lakh 

 

• Tax benefit of NPS on returns and maturity amount.

The good thing about NPDS is that the tax benefits don’t end at the investment amount only; as an investor, one does not have to pay any tax on the returns or the maturity amount as well.

The above kind of tax treatment is called EEE, i.e., exempt- except- exempt, and in India, this is available only on a selected few financial products.

NPS can also help one reduce their taxable income by a considerable amount because of its tax benefits. 

Conclusion: NPS is a great product to build a corpus for once retirement thanks to its low cost and great flexibility. Hence, look at investing in the same for the triple purpose it provides – reducing taxable income, tax-free benefit, and building a corpus for the future.